Sunday, February 28, 2010

By BRETT ARENDS

Millions of Americans are now deeply underwater on their mortgage. If you're among them, you need to stop living in a dream world and give serious thought to walking away from the debt.

No, you shouldn't feel bad about it, and you shouldn't feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family's finances first.

How widespread is this? More than 11 million families are in "negative equity"—that is, they owe more on their home than it is worth—according to a report out this week by FirstAmerican Core Logic, a real-estate data firm. That's a quarter of all families with mortgages. And for more than five million of those borrowers, the crisis is extreme: They are more than 25% underwater—the equivalent of having a $100,000 loan on a property now worth just $75,000 or less. That's true for a fifth of mortgage holders in California, nearly a third in Florida and an incredible 50% in Nevada.

Are you in this situation? Are you still battling to pay the bills each month, even when it may make little financial sense to do so?

It's time for some tough talk.

Stop trying to chase your lost equity. That money is gone. Don't think like the gambler who blows more and more cash trying to win back his losses. That's how a lot of people turn a small loss into a big one.

Saturday, February 27, 2010

Fannie Mae needs another $15 billion in federal assistance, bringing its total to more than $75 billion. And worse, the mortgage finance company warned its losses will continue this year.

The rescue of Fannie Mae and sister company Freddie Mac is turning out to be one of the most expensive after effects of the financial meltdown. The new request means the total bill for the duo will top $126 billion.

And the pain isn't over. Fannie warned Friday that it will need even more money from the Treasury, as unemployment remains high and millions of Americans lose their homes through foreclosure.

Fannie Mae reported Friday that it lost $74.4 billion, or $13.11 a share, last year, including $2.5 billion in dividends paid to the government. That compares with a loss of $59.8 billion, or $24 a share, a year earlier.

Fannie Mae, which was seized by federal regulators in September 2008, has racked up losses totaling $136.8 billion over the past three year.

Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie, lifting an earlier cap of $400 billion.

A yet to be verified story from Rough & Polished, a Moscow based website, reported that China had“confirmed its decision to acquire 191.3 tons of gold auctioned by the International Monetary Fund.” Of course, until official confirmation comes from China, no one will really know if this story is true or not. However, if true, here’s why this story would be hugely significant to the gold market.

One, such a purchase would give more validity to the theory that China, with a vested interest in the price of gold today, is willing to intercede and support gold prices whenever they are being attacked by the US Federal Reserve and Bank of England through their manipulation of fraudulent gold futures markets in London and New York.

Two, it would further support exposing the gold futures markets in London and New York as nothing more than a gold fractional reserve playground that allows the western banking cartel to manipulate gold prices. The last available Commitment of Traders reports indicated that the Commercials were short 663.83 metric tonnes of gold. This position is supposed to be fully deliverable by the Commercials should the offsetting longs ask for delivery. Even though the Commercials very likely hold some of the offsetting longs through spread positions, that short position still represents a ton (no pun intended) of gold – gold, that according to COMEX regulations, must be available for physical delivery. However, if an incredibly large tonnage of physical (not paper) gold were really available for purchase on the COMEX, why would China feel an urgency to take delivery of a mere 191.3 tonnes of gold now through the IMF? Could it be because India “scooped” them the last time the IMF made a gold sale and China does not wish to be left twisting in the wind again with very little physical gold available for delivery in the global futures markets? If the China IMF gold story were true, the above would be plausible reasons for China acting now rather than later.

Friday, February 26, 2010

California’s Assembly passed a bill allowing it to delay payments to programs including schools to avoid running out of cash, a move aimed at boosting confidence in bonds sold by the most-populous U.S. state.

The passage comes a day after Treasurer Bill Lockyer told lawmakers the bill was needed to send a signal to investors that California is taking steps to adequately manage its cash as it faces budget deficits through June 2011. Lockyer postponed a $2 billion sale that was initially scheduled for next week.

Assemblywoman Noreen Evans, the Democrat who chairs the budget committee, said the bill was needed so the state can return to the bond market to finance public projects that provide a jolt to the economy.

“The state does not want to add to the unemployment rate,” Evans said.

Controller John Chiang said last month that California may be forced to issue IOUs for the second year in a row because it’s spending more than it collects in revenue. The bill is aimed at preventing cash shortages projected as soon as next month by empowering officials to delay certain payments, including those to schools, universities and local governments, to conserve money for debt service and other key expenses.

Sales of new homes plunged to a record low in January, underscoring the formidable challenges facing the housing industry as it tries to recover from the worst slump in decades.

The Commerce Department reported Wednesday that new home sales dropped 11.2 percent last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who had expected sales would rise about 5 percent over December's pace.

While winter storms were partly to blame, home sales have fallen for three straight months despite sweeping government support. Economists were already worried that an improvement in sales in the second half of last year could falter as various government support programs are withdrawn.

"There is no doubt that January and February are going to be messy months for housing, given the severe weather conditions, but that doesn't take away from the fact that the housing sector has taken another big step back, even with the government aid," Jennifer Lee, a senior economist at BMO Capital Markets, said in a research note.

Jose Pinera provides an Entitlement State 101 lecture, in which Chile's former Labor and Social Security Minister demystifies the U.S.'s $100 trillion unfunded benefits problem. Since Pinera is the man who many years ago privatized Chile's entitlement system, America, and the entire Western system, which for the past century has been relying on unfunded liabilities to provide benefits to the population in the hopes that funding day will never come, may do well to listen to what he has to say. His message: the American way of life, more so than anything else, in which reckless spending, living on credit and not saving for the future, is precisely why the US will be bankrupt very soon. Chile swallowed the bitter pill 30 years ago and after a lot of pain, managed to get out of the hole. Will enabler state #1, America, fail where this allegedly "backward" South American country succeeded?

Some insight from Pinera:

"$100 trillion is the present value of what Americans will have one way or another to pay, unless they default on their obligation to their citizens. And that is the future, and I am extremely worried because you are like passengers in the Titanic. You see the Titanic is going toward the iceberg of aging populations but populations the feel entitled to all these huge benefits that the politicans have promised the people, but they have not funded the benefits for the future. So how are you going to pay them? That is the big issue, the big domestic problem facing America."

SA's leading indicator for the business cycle surged in December while the pace of company failures slowed last month, adding to evidence the economic recovery is gathering momentum.

The leading indicator compiled by the Reserve Bank climbed 13,9% compared with December, up from 11,8% in November, its data showed yesterday.

That suggested official figures today may show economic output accelerated more than expected in the final quarter of last year.

Company failures fell 23,7% last month compared with the same month a year earlier, figures from Statistics SA showed yesterday, reinforcing the outlook.

"There is a reasonably good relationship between SA's leading indicator and overall economic activity," Stanlib economist Kevin Lings said. "This suggests the economy should show solid growth in the fourth quarter of last year and, more importantly, should continue to recover more fully into 2010."

The economy emerged from recession in the third quarter of last year, with output expanding just 0,9%. Consensus forecasts from Reuters predict gross domestic product grew 2,5% in the fourth quarter of last year, seasonally adjusted and annualised. But the rebound is being driven mainly by global demand for local exports and restocking of inventories - which have together boosted manufacturing, one of the economy's biggest sectors.

In his latest Basic Points, Hard Rocks and Hard Shocks, Coxe credits "Aaron Regent, Barrick's market-savvy new CEO" for "fueling the flames of desire" through the concept of peak gold.

Regent has noted "that new mined production of gold has been declining for a decade," suggesting this could prove to be the equivalent of peak oil, the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.

Much of the recent commentary on gold, Coxe said "is that Obama's deficits, coupled with Bernanke's money-printing, could produce either a Depression or runaway inflation. To us, this is an argument investors really should take seriously."

Coxe advised that "a holding of gold and gold sticks offers excellent protection under both extremes, and attractive potential under a regime of moderate inflation and modest recovery."

The U.K. has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance.

So it may be fitting that the U.K. will also become the deathbed of Keynesian economics.

Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalized almost half the banking industry.

Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.

The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked “bankruptcy imminent.” At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.

Executive Summary Over the next few years, a wave of commercial real estate loan failures could threaten America’s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation’s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present “underwater” – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties. The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses. A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.

The survey, commissioned by AARP and released on Monday, asked 815 people above age 50 a variety of questions related to consumer financial protection.

More than 90 percent of all respondents "strongly" favored requiring banks to explain the terms and conditions of loans -- including mortgage and credit cards -- in plain language people can understand; and two-thirds favored allowing states to enact consumer protection measures that are stronger than federal rules. Although this last point is strongly opposed by Republicans and the big banks, 68 percent of Republican seniors support it, the survey says.

"Older Americans, whose retirement nest eggs were decimated by the failure of an outdated and compromised financial regulatory system, overwhelmingly say they want reform," Nancy LeaMond, executive vice president at AARP, said in a statement. Older Americans "want clear information so they can make better, more informed decisions and greater transparency about the financial products available to them."

A new proposal by House Republicans, lead by Rep. Scott Garrett (R., N.J.), is seeking to address changes to Fannie and Freddie accounting, along the lines of what has been previously proposed by Zero Hedge, and to not only include the GSE's losses as part of the Federal budget, but to also count the debt from the two mortgage zombies toward the nation's total statutory debt limit. As we stated previously, it is only semantics at this point which distinguish the GSE obligations from other Treasury obligations. Yet it is not just us, but the administration's very own Peter Orzsag who was pushing for consolidated GSE accounting two years ago. Yet with GSE debt most recently at $6.3 trillion, or about half of the existing Treasury debt, this would mean total US debt would not only explode by 50% overnight, but the recently increased debt ceiling would be immediately breached and America would find itself in technical default (where it really is right now for all technical purposes).

Dow Jones has more:

A memo written by Garrett's office, which was released Monday, states that "now that the federal government has explicitly backed the operations of the GSEs, there should no longer be a distinction between their debt ... and the debt issued by the Department of the Treasury."

The proposed legislation highlights the current uncertainty surrounding the two firms, which have been under government control since September 2008. Federal officials were expected to provide some guidance as to their future plans for Fannie Mae and Freddie Mac in the fiscal 2011 budget released earlier this month, but that information wasn't included.

The Office of Management and Budget, which compiles the White House's annual budget request, did acknowledge in the budget the different ways the government currently accounts for the two firms. The Congressional Budget Office accounts for the two firms "on budget," treating them like any other federal agency. OMB, meanwhile, treats them "off budget," considering them to be private companies.

A new CNN poll shows that 44 percent of Americans do not think their own representative deserves reelection in 2010. Compared to only 31 percent in 2006, and a paltry 15 percent in 2000, this new number represents a significant transformation in the way we assess our legislators. Americans have always been quick to crucify "Congress" as an abstract collective of bickering, megalomaniacal fatcats incapable of getting real governing done. But when asked to evaluate individual congressmen from their home districts, they have usually changed their tune entirely.

During the 2008 elections, 94 percent of House incumbents and 83 percent of Senate incumbents were reelected, despite the fact that 58 percent of Americans believed most members of Congress did not deserve another chance, according to a CNN poll. Rep. Mike Quigley has called this trend "the schizophrenia of the American people... They hate Congress, but they love their congressmen." Recent data, however, suggest the disease may be in remission.

Monday, February 22, 2010

The Left called for war damages for Axis occupation and accused German banks of playing a "wretched game of profiteering at the expense of the Greek people".

Mainstream New Democracy was no nicer. "How does Germany have the cheek to attack us over our finances when it has still not paid compensation for Greece's war victims? There are still Greeks weeping for lost brothers," said ex-minister Margaritis Tzimas.

This is deeply hurtful to Germany, a vibrant democracy that has played its difficult part in Europe for 60 years with dignity. No country could have done more to overcome its demons. It has paid the EU bill, and paid again, rarely grumbling.

Yet a decade of monetary union has created such a wide and self-perpetuating gap between North and South that everything in EU affairs is poisoned. German-Greek relations are the worst in my lifetime.

Nobel economist Paul Krugman said there is no point blaming any one country for this "Euromess". "Europe's policy elite bears the responsibility," he said. "It pushed hard for the single currency, brushing off warnings that exactly this sort of thing might happen, although even eurosceptics never imagined it would be this bad." Actually, we did, Professor. Thanks anyway.

Even as the American economy shows tentative signs of a rebound, the human toll of the recessioncontinues to mount, with millions of Americans remaining out of work, out of savings and nearing the end of their unemployment benefits.

“There are no bad jobs now. Any job is a good job,” said Jean Eisen, who became unemployed more than two years ago.

Economists fear that the nascent recovery will leave more people behind than in past recessions, failing to create jobs in sufficient numbers to absorb the record-setting ranks of the long-term unemployed.

Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives — potentially for years to come.

Yet the social safety net is already showing severe strains. Roughly 2.7 million jobless people will lose their unemployment check before the end of April unless Congress approves the Obama administration’s proposal to extend the payments, according to the Labor Department.

Friday, February 19, 2010

The Federal Reserve decided Thursday to boost the rate banks pay for emergency loans. The action is part of a broader move to pull back the extraordinary aid it provided to fight the financial crisis.

The action won't directly affect borrowing costs for millions of Americans. But with the worst of the crisis over, it brings the Fed's main crisis lending program closer to normal.

The Fed chose to bump up the so-called "discount" lending rate by one-quarter point to 0.75 percent. It takes effect Friday.

The central bank said the step should not be seen as a signal that it will soon boost interest rates for consumers and businesses. It repeated its pledge to keep such rates at record-low levels for an "extended period" to foster the economic recovery.

The Fed had signaled for weeks that a higher discount rate was coming, though the timing of Thursday's decision caught some by surprise. It portrayed its action as moving its emergency program for banks closer to normal.

Thursday, February 18, 2010

On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman's role in precipitating the global financial crisis.

The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a "bailout tax" on banks. Maybe this wasn't the right time for Goldman to be throwing its annual Roman bonus orgy.

Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative."

Translation: We made a shitload of money last year because we're so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.

Goldman wasn't alone. The nation's six largest banks — all committed to this balls-out, I drink your milkshake!strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. "What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?" asks Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor of New York.

The “shadow inventory” of bank-repossessed properties, as well as distressed mortgages facing foreclosure, will take nearly three years to clear at the current sales rate, according to a report from the credit rating agencyStandard & Poor’s (S&P). The analysts add that during this period many servicers will likely shift their emphasis from mortgage modification to loan liquidation.

The “shadow inventory” of homes includes all delinquent loans and real-estate owned (REO) property that has not reached the market. REO property are foreclosed homes taken back by the bank for liquidation. As for the total amount of homes in the shadow inventory, Amherst Securitiesplaces the total at 7m. The Royal Bank of Scotland found 2.7m, and First American CoreLogiccounted 1.7m.

S&P estimates the inventory to equal a 33-month supply of homes. Analysts added the estimate is actually conservative, as they did not assume homes not showing signs of distress would default and push the overhang of supply even further.

Furthermore, court delays, political pressure and servicing backlogs constricted the flow of foreclosures hitting the market to a trickle. These delinquent borrowers who have not received a foreclosure fuel the “rapidly” growing shadow inventory of properties, according to the report.

Unemployment remains stubbornly high and the public is losing faith in the rest of his ambitious policy agenda. But there may yet be time to plan a bigger celebration next year.

Some are still finding reason for muted cheers now. Using traditional Keynesian modelling favoured by Wall Street and Washington, the plan has created both GDP growth and jobs. But it is an old-fashioned way of analysis. So-called New Keynesian models, which assume households and businesses alter their economic behaviour today based on future expectations of government tax or spending policy, find a far smaller or even negative impact.

The wisdom of this approach is borne out, for instance, by businesses big and small. They're largely frozen by concerns about the impact of growing deficits, as well as shifting policy. The stimulus already costs $75 billion more than first expected.

That may explain why more Americans are becoming New Keynesians. A recent CNN poll found 56 per cent opposed to the stimulus, with only a quarter believing it has helped the middle class. It's true the economy was worse than almost everyone expected. But Team Obama's original forecasts were well wide of the mark. It predicted the stimulus plan would prevent mass unemployment – and keep the level from reaching 8 per cent. It's now at 9.7 per cent and even government forecasts see a bounce back up to double digits.

The White House isn't conceding it should have allocated the stimulus money differently, or even doled out more of it. Still, with 60 per cent of the funds unspent, there remains a chance at salvaging the plan, and some of Obama's supporters.

"It keeps me awake at night, looking at all that red ink," said President Obama in Nashua, N.H., on Feb. 2. "Most of it is structural and we inherited it. The only way that we are going to fix it is if both parties come together and start making some tough decisions about our long-term priorities."

Obama will sign an executive order tomorrow that establishes a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how to reduce the country's debt.

Over the past year alone, the amount the U.S. government owes its lenders has grown to more than half the country's entire economic output, or gross domestic product.

Even more alarming, experts say, is that those figures will climb to an unprecedented 200 percent of GDP by 2038 without a dramatic shift in course.

Economic forecasters say future generations of Americans could have a substantially lower standard of living than their predecessors' for the first time in the country's history if the debt is not brought under control.

“Fannie Mae and Freddie Mac are already insolvent, and face "significant negative impact" on their net worth resulting from the required consolidation of "off balance sheet" loans into their financial reporting, which will take effect in financial statements for periods beginning January 1, 2010. Over 60% of the U.S. foreclosure market now falls under the umbrella of these two entities.

Under the Housing and Economic Recovery Act of 2008 (HERA), Congress authorized the Treasury to provide sufficient funding to insure up to $300 billion dollars of original principal. Yet in a move that was clearly no part of Congressional intent, the Treasury has announced that it will allow this commitment to "increase as necessary to accommodate any cumulative reduction in net worth over the next three years." Coincident with this, the Federal Reserve has accumulated nearly $1.5 trillion of Fannie Mae and Freddie Mac securities (MBS and agency debt), which is has no plan to liquidate other than lip service. Rather, it is allowing these securities to run off through maturity and pre-payment. Of course, the funds to pay off those maturing securities will largely come from the Treasury. Meanwhile, Bernanke has made it clear that the most important tool of the Fed during the interim will not be liquidation of these securities, but instead the payment of interest on bank reserves.

If one is alert, it is evident that the Federal Reserve and the U.S. Treasury have disposed of the need for Congressional approval, and have engineered a de facto bailout of Fannie Mae and Freddie Mac, at public expense.”

When he urged Americans to "stop driving" their Toyotas last week, was Transportation SecretaryRay LaHood speaking as the head of a federal agency concerned with highway safety or as a sales advocate for a nationalized General Motors?

In testimony before the House Appropriations subcommittee on transportation last Wednesday, LaHood said: "My advice to anyone who owns one of these vehicles is stop driving it, and take it to the Toyota dealership because they believe they have the fix for it."

Later that day, LaHood tried to clarify his remark, adding that the National Highway Traffic Safety Administration "will continue to hold Toyota's feet to the fire to make sure that they are doing everything they have promised to make their vehicles safe. We will continue to investigate all possible causes of these safety issues."

Certainly, Toyota's faulty accelerators and brakes are legitimate safety issues, as are many of the other 2,000 recalls a year logged by the NHTSA. However, La Hood's remarks, implying that Toyotas are unsafe to drive and that company leaders have been evasive about the problems, should raise some eyebrows.

After all, the Obama administration bought a 60 percent stake in General Motors costing taxpayers more than $50 billion and is thus vested politically in the company's success. That GM's value must exceed at least $83 billion (bearing in mind that the company's highest-ever market valuation was $60 billion in 2000) before taxpayers can be made whole is the prism through which the administration's words and actions on the auto industry should be viewed.

Tuesday, February 16, 2010

As the U.S. housing market boomed in the past decade and fueled a bull market in mortgage investments, Norway's government-owned fund went along for the ride -- and the fall.

After that fund recorded its worst-ever year in 2008, managers cited investments backed by U.S. mortgages as a key culprit and began to cut back.

Now, U.S. officials are looking to foreign government funds again. The Federal Reserve is scheduled at the end of March to halt its purchases of mortgage-backed securities, a move that could drive up the low interest rates that have helped the housing market show new signs of life. The Fed is gambling that private investors will step in to buy the securities, helping to keep rates from spiking. Senior officials in the Obama administration and at the Fed say they are counting in part on foreigners to keep the housing market funded.

But financial analysts and advisers familiar with foreign government funds, known as sovereign wealth funds, predicted that the United States will get limited relief from abroad.

HTC just unveiled the successor to last year's Hero handset at Mobile World Congress. Called the Legend, it's pretty much everything we've come to expect. It has a similar form factor to the Hero with its slight chin but it gets an overall boost in performance.

The squeeze on debt will begin to be felt in January next year, when lenders are due to start repaying £319bn borrowed from the Government during the original crisis in 2007 and 2008 – a quarter of the UK's entire £1.3 trillion stock of mortgages.

To pay the money back, credit-rating agency Moody's said, banks and building societies may "limit their lending through tighter credit criteria" – in other words reducing availability and making mortgages more expensive.

Capital Economics added: "The prospect of a fresh mortgage credit squeeze later this year or during 2011 hardly inspires confidence in the durability of the housing market recovery."

Credit is already tight. In 2009, societies removed £7.4bn from the mortgage market and approvals dropped to 1.3m, compared with 3.4m annually from 2005 to 2007.

Lobby groups have called on the authorities to delay the timetable but, last week, Mervyn King, Bank of England Governor, confirmed that the main state-backed liquidity scheme, providing £185bn of funding, would end in January 2011 as scheduled. The full £319bn must be repaid by April 2014.

Echoing a warning from the Council of Mortgage Lenders (CML) that removing Government support will choke off lending and raise mortgage costs, Moody's said yesterday: "If debt markets cannot take up some of the funding gap left by Government schemes, the impact on the UK mortgage market will be significant... The contraction will put pressure onhouse prices ."

Over the next six months, the federal government plans to wind down many of its emergency programs for housing. Then it will become clear if the market can function on its own.

People here are pretty sure the answer will be no.

President Obama has traveled twice to this beleaguered manufacturing city to spotlight the government’s economic stimulus program. The employment picture here has indeed begun to improve over the last nine months.

But Elkhart also symbolizes the failure of federal efforts to turn around the housing slump at the heart of the economic crisis. Housing in this community has become almost entirely dependent on a string of federal support programs, which are nonetheless failing to prevent a fall in prices and a rise in mortgage delinquencies.

More than one in 10 mortgage holders in Elkhart is seriously behind on payments. The median sales price has plunged to the level of a decade ago. Many homeowners owe more than their home is worth, freezing them in place for years. Foreclosures recently hit a record.

To the extent that the real estate market is functioning at all, people here say, it is doing so only because of the emergency programs, which have pushed down interest rates on mortgages and offered buyers a substantial tax credit.